The Legislature - Budgeting
Since projections suggest the federal debt will continue to increase, it's appropriate that we spend a week discussing the budgeting process so we can have a some understanding of how we got where we are, if it is in fact the problem that some some suggest it is, and what solutions might exist for rolling the debt back. The process involves both the legislative and executive branches, and of course also occurs at the state and local in addition to the national level. We will attempt to cover it all.
Study Guide
For my lecture students, be familiar with the following:
- The institutions involved in the budgetary process.
-
- budget
- authorization
- appropriations
- mandatory spending
- discretionary spending
- deficit
- debt
- revenue
- fiscal policy
- monetary policy
Short Answer Assignments
For my online students, answer the following questions in at least 150 words.
1. Detail the evolution of the budgetary process in the United States
2. The Office of Management and Budget and the Congressional Budget Office have similar responsibilities, but work within two separate branches of government. Each makes estimates about the budget, but comes up with their own numbers, so they may disagree about budgetary issues. Review the information on the website's of each agency and determine whether they see eye to eye on the 2010 budget.
3. As is mentioned below, at least 60% of the federal budget is non-discretionary, meaning that it must be spent due to existing law. Two of the largest categories of non-discretionary spending are Social Security and Medicare. Questions exist about the long term security of each program. Detail these questions and outline the steps that must be taken to make them solvent.
4. Earlier this year Congress passed and President Obama signed the American Recovery and Reinvestment Act. Research the act and describe its intent. The touch on the current controversy about whether it has had its intended effect.
Please email these to me by the due date on the syllabus.
Readings:
The following websites provide useful background information about both the United States economy and the budgeting process. Use them as a resource. Some of the information contained below is pulled from these sites.
Though revenue has been collected and redistributed by the national and state governments since their creations, the budgetary process is relatively new. The Constitution grants to Congress the power to set taxes and appropriate money. This is the "power of the purse" and it is the most significant power given to Congress. In fact the only bill that the Texas Legislature is required to pass is the budget, that's all it needs to do. The United States Constitution states that the Congress can collect revenue, borrow money, determine how it is to be spent and investigate how it was spent. But nothing is said about how this is to be done. One specific mandate that does exist however is that money not be appropriated without an explicit grant by Congress. As a consequence, a conference committee with various subcommittees with jurisdiction over several spending areas has emerged. The committee holds the final word over the expenditure of federal money.
On the national level, the need for a budgeting process did not emerge until the size of the government, and the amount of government revenue both began to increase in the early years of the 20th Century. Prior to this the process was informal, decentralized and ad-hoc. As long as revenues and expenditures were low, stable, and relatively simple, there was no need for a formalized process to oversee the budget. But as the functions of government not only increased but grew more complex, a formal process was needed to make sense of it all.
Three pieces of legislation were primarily responsible for shaping the budgetary process over time.
1 - The Budget and Accounting Act of 1921: As with many legislative actions of this period of time, it was driven by the Progressive movement which had grown distrustful of legislative activities (and the private interests that controlled them) and sought to professionalize government primarily through the use of executive agencies composed of individuals with technical expertise in an assigned area. This brought the executive branch into the budgetary process by establishing the Bureau of the Budget (now the Office of Managament and Budget) which was to assist the President in formulating the budget by reviewing budgetary requests from the various executive agencies, collecting them into one consolidated bill and sending it to Congress for consideration and passage. The OMB has evolved into an office that also makes projections about future budgets based on estimations of the state of the economy and demographic changes underway. Tha act also established what is now called the Government Accountability Office which was charged with auditing, evaluating and investigating how the budgeted requests were carried out.
2 - Congressional Budget and Impoundment Control Act of 1974: Two events in the 1960s led to revisions in the budgetary process. The first was the passage of Great Society programs, along with military actions in Vietnam, which increased federal expenditures and added additional complexities to the budget since many more agencies were making budgetary requests. The second was the election in 1968 of Richard Nixon who attempted to cut federal spending at his own discretion in order to keep the budget at a manageable level. This process is called impoundment, the refusal of a president to spend money authorized and appropriated by Congress. This led to the establishment of committees to propose changes in the budgetary process, The purpose of the eventual bill was to reassert congressional authority in the budgetary process. Budget committees were created for the House and Senate, and the Congressional Budgetary Office.
The budget committees, which have their own staffs and budgets, provide members of Congress the opportunity to review, hear testimony about, and markup the budget sent to them by the President. The CBO gives them an independent, and non-partisan, source of information about the state of the budget and projections about where it is likely to head. The act created the concurrent budget resolution, which helped coordinate and streamline the congressional side of the process. The resolution allows for all members of Congress to vote on a single bill prior to consideration by the separate committees. But by bringing additional players into the budgetary process it has also slowed it down. Debate over budgeted items can now take place at three separate points in the process, the consideration of the budget resolution, the authorization process and the appropriations process.
The Act also established the budget reconciliation process which allows for public policies to be changed to comply with the revenue and spending levels agreed to in the budget resolution. In essence it allows for change in law, after the fact, in order to comply with the requirements of the budget. Though originally intended to serve as a minor way to make adjuctments necessary to comply with the budget resolution, it has since become a tool for making significanct policy changes. This is especially true since reconciliation bills can only be argued for 20 hours on the floor of the Senate, meaning that they cannot be filibustered.
Omnibus Budget Reconciliation Acts have since become vehicles for changes in spending and tax levels that could not otherwise be passed on their own. For example the Consolidated Omnibus Reconciliation Act of 1986. Mandated continued medical insurance coverage after leaving a job. This is the source of COBRA which has been much discussed recently. And the Omnibus Reconciliation Act of 1993. Sought to reduce budget deficit through tax increases.
3 - Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings Act): The budget deficit and national debt exploded between 1981 and 1985. In response to continued increases in the deficit, a procedure was developed by three senators to force spending cuts. The act attempted to place a gradual series of limits on the amount of the deficit with the intend to drive it to zero within by the early 1990s. In case a balanced budget was not produced by Congress, or that the budget did not meet targetted reductions, an automatic process called sequestration would kick in. The head of the then General Accounting Office, the Comptroller-General, would make the determination if the targets were not met. Automatic across the board cuts in discretionary spending would ensue.
The problem with this scheme is that it was unconstitutional, and was declared unconstitutional in Bowsher v. Synar (1986). The powers granted to the Comptroller General, an official in the legislative branch because he was subject to Congress -- which is the law making branch as we know, were executive powers. This violated the separation of powers. Adjustments were made to the law. The Office of Management and Budget was given authority over sequestration, and the goals of the deficit reduction were reduced. Two later acts modified the law, The Budget Enforcement Act of 1990 etablished limits on discretioary spendign and a "pay as you go" requirement that demands that new programs be deficit neutral, meaning that they contain within them the revenue generating means that will pay for them.
- September of the year prior to the fiscal year: Executive branch agencies submit initial budget requests
- October of the year prior to the fiscal year: Other agencies submit budget requests
- November and December of the year prior to the fiscal year: Legislative & judical branches submit budget requests
- December of the year prior to the fiscal year: CBO determines if additional cutting of spending necessary
- December of the year prior to the fiscal year: OMB provides estimates of the status of discretionary spending
- By 1st Monday in February: President submits proposed budget to Congress.
- February 15: Congressional Budget Office submits report on economic and budget outlook to the House and Senate Budget committees.
- Six weeks after proposed budget: House and Senate committees submit reports on view and estimates to their respective budget committees.
- April 1: Senate Budget Committee reports budget resolution.
- April 15: Congress completes action on budget resolution.
- May 15: Appropriations bills may be considered in the House starting on this date, even if Congress has not agreed on a budget resolution.
- June 15: Deadline for completion of reconciliation legislation.
- June 30: Deadline for the House to pass all 13 appropriations bills.
- July 15: President submits mid-session review of the budget to Congress.
- August 20: OMB updates sequestration review
- October 1: Fiscal year begins. This is the deadline for enactment of appropriations bills. If these bills are not passed by this date, nonessential government operations must cease unless a continuing resolution is approved.
The official budget of the United States is a large and complex document. The actual size of the budget is influenced as much, if not more, by external circumstances as it is by the decisions of members of Congress. For example, more than half the budget is mandatory spending on items set into law, and not discretionary spending that can be revoked. The primary mandatory items are entitlements such as Social Security, Medicare and Medicaid in addition to interest payments on the debt. Everything else is discretionary, but about half of this is defense spending which tends to be safe. Whatsmore, the actual spending on some entitlements are dependent upon the economy. We don't know how much will be spent on unemployment insurance, for example, until people apply for it. If the economy goes sour, more people apply, and more people may also decide to go back to school and apply for Pell Grants. The same is true for revenue. When unemployment goes up, tax collections drop because people are making less money.
Budgetting is a tricky thing. Below I'll discuss several of these items separately.
Mandatory (or Non-Discretionary) Spending: Mandatory spending is defined as spending that is mandated by programs established by law that are outside of the normal budgetary process. This is money that must be spent because the law dictates that it be spent. They cannot be arbitrarily cut. These include spending on most of the largest items in the budget: Social Security, Medicare, Medicaid, (entitlements) and interest payments on the U.S. Debt. Over 60% of the total budget of the United States is mandatory, which some use as evidence that cutting the budget is a much more difficult thing to do than we might appreciate, because it involves changing the law governing these programs. Given the vocal constituencies supporting each of these programs however, this is not an easy thing to do.
Here is a brief rundown of each of these programs:
- Social Security: Social Security is a government run pension fund, also called a social insurance program, that was established in 1935 during the second wave of the New Deal. It is funded, as anyone who receives a paycheck knows, by a payroll tax (the Federal Insurance Contributions Act). Contributors are then eligible for monthly checks after they reach a certain age and retire. Almost 20% of expenditures are spent on Social Security.
- Wikipedia: Social Security.
- Social Security Online.
- Medicare: As with Social Security, Medicare is a social insurance program paid -- with a payroll tax -- that pays for medical benefits primarily for individuals aged 65 or older.
- Wikipedia: Medicare
- Medicare.gov.
- Medicaid: Medicaid is also a health program, but it is a means tested program that provides benefits for the poor.
- Wikipedia: Medicaid:
- Center for Medicaid Services.
- Interest on the Debt: Whenever expenses outweigh revenues, the federal government has to borrow money to fill the gap. Generally these are in the form of treasury bonds which pay interest to the holders of the bonds. The interest on these bonds must be paid if they are to have any integrity. As the size of the debt has increased, the amount needed to pay for the interest on it has increased as well
- Treasury Direct: Interest on the Debt Outstanding.
Discretionary Spending: Discretionary spending is just that, spending that is optional, at least is a budgetary sense. There is nothign in law that mandates that money be spent on any of these items, though there may be political pressure to do so.
- Defense Spending: Spending on the military accounts for half of the discretionary budget and about 20% of the total budget, about the same as Social Security. The Constitution limits defense spending in Section 8 of Article 1: "no appropriation of money to that use [to raise support an army] shall be for a longer term than two years." This requires defense spending to be reauthorized, which it is, but on a one year cycle. Until World War II, defense spending in the U.S. ebbed and flowed depending on whether the country was at war. After World War II the Defense Department was created and a permanent peacetime military was established.
One criticism often thrown at the military budget, aside from its size, is whether expeditures are driven by the actual defense needs, or the desire of members of Congress to provide pork barrel projects for their districts.
- Wikipedia: Military Budget of the United States.
- Other Spending: The total amount of spent on all other discretionary federal programs is the same as the defense budget.
Spending in Texas.
Spending in the Greater Houston Area. Revenue Collection.
Revenue is collected in a variety of ways in each level of government. On the national level the primary sources of revenue are the income tax, the payroll tax and corporate income taxes. The sales tax is the principle course of revenue in Texas, though some states also use income taxes. The principle source of revenue on the local level is the property tax. States and local governments also recieve a significant amount of money from the federal government. These are broken down below.
- Wikipedia: Taxation in the United States.
- History of Taxation: It is worth noting that the history of political protest in British and American history has often centered on taxes. This was true from Magna Carta to the execution of Charles the First through the signing of the British Declaration of Rights and the U.S. Declaration of Indendence. The North American colonies were lightly taxed until increased security needs required that security be funded. The colonists' belief that the methods used (a variety of sales and excise taxes essentially) were unfairly imposed, led to the revolution. The early federal government used tariffs as its principle means of collecting revenue.
These taxes served an additional purpose beyond collecting revenue. They also protected the development of American industry by raising the prices of goods produced by foreign competitors who had the advantage of economies of scale. Since imports came primarily from the sea, smuggling was a huge problem. Importers attempted to bypass tariffs by avoiding tax collectors. In response the Unites States Revenue Cutter Service was established to enforce tariff policies. They would eventually be merged with other agencies to form the Coast Guard.
- Wikipedia: Taxation History in the United States.
- The Income Tax: An income tax is just that, a tax imposed on income. Generally a handful of exceptions are made about what types of income is taxable (health care benefits for example are exempt) and tax rates tend to progressive, which means that rates increase as incomes rise, though the amount of the increase varies. Income taxes were first used to help fund the Civil War, but did not become a permanent part of the tax system until the passage of the Sixteenth Amendment in 1913. Prior to the passage of the amendment, questions were raised whether income taxes were constitutional. The Constitution allows for direct taxes apportioned to the states according to their population. Since the income does not do this, an amendment was required in order to make it constitutional.
Currently the income tax is appraised based on several tax brackets. The income collected in each of these brackets is taxes at a particular rate, which tops out at a 35% rate for anything earned over approximately $375,000 a year. Taxes are collected by being withheld from paychecks. Any amount collected beyond what is required is returned as a refund the following year.
- Wikipedia: Income Taxes in the United States.
- Payroll Taxes: Payroll taxes are taxes collected specifically to fund Social Security and Medicare. They are separate deductions taken from paychecks that are then dedicated to pay for those programs. The purpose behind this funding mechanism is to ensure that they are more likely to be solvent.
- Wikipedia: Payroll Taxes.
- Wikipedia: Federal Insurance Contribution Act.
Revenue Collection in the Houston Area: The Debt, Deficits, and Surpluses.
On the national level, the revenue and spending processes are independent. The national budget therefore is rarely balanced. When expenditures exceed revenues, the budget is in deficit. When revenues exceed expenditures, the budget is in surplus. The sum total of the deficits run over several years is called the national debt.
A History of United States Debt.
Much of early American governmental history was involved with properly handing the national debt, especially the debt accumulated during the revolutionary war. One of the reasons why the Constitutional Convention was called was to determine how to pay down the debt that was owed not only to foreign powers, but to American citizens including those who were issued promissory notes. These notes were especially troublesome because many people had sold these at a fraction of their face value because they were not sure they would ever be paid back in full. Alexander Hamilton was adamant that they be paid back in full because that would be the best way to demonstrate the stability of the new government.
Hamilton was a strong proponent of maintaining a reasonable level of debt as a way to ensure that sufficient investments were being made in the infrastructure necessary to facilitate America's commercial development.
The Current Level of Debt.
The United States has gone through distinct periods of high debt, generally tied into expenditures associated with war. Aside from the Revolutionary War period, the level of debt also exploded during the Civil War and World Wars I and II. While the current level of debt can also be traced to spending on military conflicts (in a constitutional sense we have not had a "war' since World War II), it can also be traced to the increased levels of social spending as a result of the New Deal and the Great Society, as well as the tax cuts that began to be passed beginning in the early 1980s.
The national debt actually has two components. One is the public debt, which is the amount of money that is owed by the national government to individuals who hold Treasury Bills, or any other debt instrument sold to earn the revenue necessary to pay for the spending on budgeted items. The second component is intra-governmental tranfers, which is that money that the national government has borrowed from other sources within the government, most likely the Social Security or Medicare trust funds. These two figues together make up the gross public debt.
As of 2008, the gross public debt was
Here's a controversial question. Is the debt in fact too high? And if it is too high, what problems does it pose?
Simply put, deficits and surpluses are the consequences of imbalances in the budget. A deficit results when more money is spent than is collected in revenue, while a surplus occurs when more revenue is collected than is spent. As mentioned above, the level of spending and revenue collection is often not known ahead of time since much of each is based on a formula not a dollar amount. The amount collected in income, sales and property taxes is not known until we know how much people earned and purchased and the level at which homes have been appraised. And the amount spent is generally determined by how many people qualify for benefits based on whether they meet certain standards, not a predetermined amount.
Discretionary spending: $1.368 trillion
- $663.7 billion - Defense Department
- $72.5 billion - Department of Transportation
- $52.5 billion - Department of Veterans Affairs
- $51.7 billion - Department of State]] and Other International Programs
- $47.5 billion - Department of Housing and Urban Development
- $46.7 billion - Department of Education
- $42.7 billion - Department of Homeland Security
- $26.3 billion - Department of Energy
- $26.0 billion - Department of Agriculture
- $23.9 billion - Department of Justice
- $18.7 billion - National Aeronautics and Space Administration
- $13.8 billion - Department of Commerce
- $13.3 billion - Department of Labor
- $13.3 billion - Department of the Treasury
- $12.0 billion - Department of the Interior
- $10.5 billion - Environmental Protection Agency
- $9.7 billion - Social Security Administration
- $7.0 billion - National Science Foundation
- $5.1 billion - Corps of Engineers
- $5.0 billion - National Infrastructure Bank
- $1.1 billion - Corporation for National and Community Service
- $0.7 billion - Small Business Administration
- $0.6 billion - General Services Administration
- $19.8 billion - Other Agencies
- $105 billion - Other
The Legislature - Budgeting
Since projections suggest the federal debt will continue to increase, it's appropriate that we spend a week discussing the budgeting process so we can have a some understanding of how we got where we are, if it is in fact the problem that some some suggest it is, and what solutions might exist for rolling the debt back. The process involves both the legislative and executive branches, and of course also occurs at the state and local in addition to the national level. We will attempt to cover it all.
Study Guide
For my lecture students, be familiar with the following:
- The institutions involved in the budgetary process.
-
- budget
- authorization
- appropriations
- mandatory spending
- discretionary spending
- deficit
- debt
- revenue
- fiscal policy
- monetary policy
Short Answer Assignments
For my online students, answer the following questions in at least 150 words.
1. Detail the evolution of the budgetary process in the United States
2. The Office of Management and Budget and the Congressional Budget Office have similar responsibilities, but work within two separate branches of government. Each makes estimates about the budget, but comes up with their own numbers, so they may disagree about budgetary issues. Review the information on the website's of each agency and determine whether they see eye to eye on the 2010 budget.
3. As is mentioned below, at least 60% of the federal budget is non-discretionary, meaning that it must be spent due to existing law. Two of the largest categories of non-discretionary spending are Social Security and Medicare. Questions exist about the long term security of each program. Detail these questions and outline the steps that must be taken to make them solvent.
4. Earlier this year Congress passed and President Obama signed the American Recovery and Reinvestment Act. Research the act and describe its intent. The touch on the current controversy about whether it has had its intended effect.
Please email these to me by the due date on the syllabus.
Readings:
The following websites provide useful background information about both the United States economy and the budgeting process. Use them as a resource. Some of the information contained below is pulled from these sites.
- About.com: US Economy.
- US Bureau of Labor Statistics: The Economy at a Glance.
- United States: CRS: Introduction to the Federal Budget Process.
- Texas: Budget 101: A Guide to the Budget Process in Texas.
The Evolution of the Budgetary Process.
Though revenue has been collected and redistributed by the national and state governments since their creations, the budgetary process is relatively new. The Constitution grants to Congress the power to set taxes and appropriate money. This is the "power of the purse" and it is the most significant power given to Congress. In fact the only bill that the Texas Legislature is required to pass is the budget, that's all it needs to do. The United States Constitution states that the Congress can collect revenue, borrow money, determine how it is to be spent and investigate how it was spent. But nothing is said about how this is to be done. One specific mandate that does exist however is that money not be appropriated without an explicit grant by Congress. As a consequence, a conference committee with various subcommittees with jurisdiction over several spending areas has emerged. The committee holds the final word over the expenditure of federal money.
On the national level, the need for a budgeting process did not emerge until the size of the government, and the amount of government revenue both began to increase in the early years of the 20th Century. Prior to this the process was informal, decentralized and ad-hoc. As long as revenues and expenditures were low, stable, and relatively simple, there was no need for a formalized process to oversee the budget. But as the functions of government not only increased but grew more complex, a formal process was needed to make sense of it all.
Three pieces of legislation were primarily responsible for shaping the budgetary process over time.
1 - The Budget and Accounting Act of 1921: As with many legislative actions of this period of time, it was driven by the Progressive movement which had grown distrustful of legislative activities (and the private interests that controlled them) and sought to professionalize government primarily through the use of executive agencies composed of individuals with technical expertise in an assigned area. This brought the executive branch into the budgetary process by establishing the Bureau of the Budget (now the Office of Managament and Budget) which was to assist the President in formulating the budget by reviewing budgetary requests from the various executive agencies, collecting them into one consolidated bill and sending it to Congress for consideration and passage. The OMB has evolved into an office that also makes projections about future budgets based on estimations of the state of the economy and demographic changes underway. Tha act also established what is now called the Government Accountability Office which was charged with auditing, evaluating and investigating how the budgeted requests were carried out.
- Wikipedia: The Budget and Accounting Act of 1921.
- A historical review from the House Rules Committee.
2 - Congressional Budget and Impoundment Control Act of 1974: Two events in the 1960s led to revisions in the budgetary process. The first was the passage of Great Society programs, along with military actions in Vietnam, which increased federal expenditures and added additional complexities to the budget since many more agencies were making budgetary requests. The second was the election in 1968 of Richard Nixon who attempted to cut federal spending at his own discretion in order to keep the budget at a manageable level. This process is called impoundment, the refusal of a president to spend money authorized and appropriated by Congress. This led to the establishment of committees to propose changes in the budgetary process, The purpose of the eventual bill was to reassert congressional authority in the budgetary process. Budget committees were created for the House and Senate, and the Congressional Budgetary Office.
The budget committees, which have their own staffs and budgets, provide members of Congress the opportunity to review, hear testimony about, and markup the budget sent to them by the President. The CBO gives them an independent, and non-partisan, source of information about the state of the budget and projections about where it is likely to head. The act created the concurrent budget resolution, which helped coordinate and streamline the congressional side of the process. The resolution allows for all members of Congress to vote on a single bill prior to consideration by the separate committees. But by bringing additional players into the budgetary process it has also slowed it down. Debate over budgeted items can now take place at three separate points in the process, the consideration of the budget resolution, the authorization process and the appropriations process.
The Act also established the budget reconciliation process which allows for public policies to be changed to comply with the revenue and spending levels agreed to in the budget resolution. In essence it allows for change in law, after the fact, in order to comply with the requirements of the budget. Though originally intended to serve as a minor way to make adjuctments necessary to comply with the budget resolution, it has since become a tool for making significanct policy changes. This is especially true since reconciliation bills can only be argued for 20 hours on the floor of the Senate, meaning that they cannot be filibustered.
Omnibus Budget Reconciliation Acts have since become vehicles for changes in spending and tax levels that could not otherwise be passed on their own. For example the Consolidated Omnibus Reconciliation Act of 1986. Mandated continued medical insurance coverage after leaving a job. This is the source of COBRA which has been much discussed recently. And the Omnibus Reconciliation Act of 1993. Sought to reduce budget deficit through tax increases.
- Wikipedia: Congressional Budget and Impoundment Control Act of 1974.
- A historical review from the House Rules Committee.
- U.S. House Committee on Rules: The Budget Reconciliation Process.
3 - Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings Act): The budget deficit and national debt exploded between 1981 and 1985. In response to continued increases in the deficit, a procedure was developed by three senators to force spending cuts. The act attempted to place a gradual series of limits on the amount of the deficit with the intend to drive it to zero within by the early 1990s. In case a balanced budget was not produced by Congress, or that the budget did not meet targetted reductions, an automatic process called sequestration would kick in. The head of the then General Accounting Office, the Comptroller-General, would make the determination if the targets were not met. Automatic across the board cuts in discretionary spending would ensue.
The problem with this scheme is that it was unconstitutional, and was declared unconstitutional in Bowsher v. Synar (1986). The powers granted to the Comptroller General, an official in the legislative branch because he was subject to Congress -- which is the law making branch as we know, were executive powers. This violated the separation of powers. Adjustments were made to the law. The Office of Management and Budget was given authority over sequestration, and the goals of the deficit reduction were reduced. Two later acts modified the law, The Budget Enforcement Act of 1990 etablished limits on discretioary spendign and a "pay as you go" requirement that demands that new programs be deficit neutral, meaning that they contain within them the revenue generating means that will pay for them.
- Answers.com: Balanced Budget and Emergency Deficit Control Act of 1985.
- The Making of the Federal Budget.
- Columbia University: The Budget Process.
- Wikipedia: The United States Budgetary Process
- Wikipedia: The United States Federal Budget.
- A Citizen's Guide to the Federal Budget.
The United States Budgetary Calendar.
- September of the year prior to the fiscal year: Executive branch agencies submit initial budget requests
- October of the year prior to the fiscal year: Other agencies submit budget requests
- November and December of the year prior to the fiscal year: Legislative & judical branches submit budget requests
- December of the year prior to the fiscal year: CBO determines if additional cutting of spending necessary
- December of the year prior to the fiscal year: OMB provides estimates of the status of discretionary spending
- By 1st Monday in February: President submits proposed budget to Congress.
- February 15: Congressional Budget Office submits report on economic and budget outlook to the House and Senate Budget committees.
- Six weeks after proposed budget: House and Senate committees submit reports on view and estimates to their respective budget committees.
- April 1: Senate Budget Committee reports budget resolution.
- April 15: Congress completes action on budget resolution.
- May 15: Appropriations bills may be considered in the House starting on this date, even if Congress has not agreed on a budget resolution.
- June 15: Deadline for completion of reconciliation legislation.
- June 30: Deadline for the House to pass all 13 appropriations bills.
- July 15: President submits mid-session review of the budget to Congress.
- August 20: OMB updates sequestration review
- October 1: Fiscal year begins. This is the deadline for enactment of appropriations bills. If these bills are not passed by this date, nonessential government operations must cease unless a continuing resolution is approved.
Institutions involved in the process:
- Office of Management and Budget. (Wikipedia Page)
- Congressional Budget Office. (Wikipedia Page)
- House Budget and Appropriations Committees
- Senate Budget and Appropriations Committees
Bill and Reports:
- 2010 U.S. Budget.
- CBO: Budget and Economic Outlook.
- LOC: The Status of Appropriations Bills.
Spending in the United States.
The official budget of the United States is a large and complex document. The actual size of the budget is influenced as much, if not more, by external circumstances as it is by the decisions of members of Congress. For example, more than half the budget is mandatory spending on items set into law, and not discretionary spending that can be revoked. The primary mandatory items are entitlements such as Social Security, Medicare and Medicaid in addition to interest payments on the debt. Everything else is discretionary, but about half of this is defense spending which tends to be safe. Whatsmore, the actual spending on some entitlements are dependent upon the economy. We don't know how much will be spent on unemployment insurance, for example, until people apply for it. If the economy goes sour, more people apply, and more people may also decide to go back to school and apply for Pell Grants. The same is true for revenue. When unemployment goes up, tax collections drop because people are making less money.
Budgetting is a tricky thing. Below I'll discuss several of these items separately.
Mandatory (or Non-Discretionary) Spending: Mandatory spending is defined as spending that is mandated by programs established by law that are outside of the normal budgetary process. This is money that must be spent because the law dictates that it be spent. They cannot be arbitrarily cut. These include spending on most of the largest items in the budget: Social Security, Medicare, Medicaid, (entitlements) and interest payments on the U.S. Debt. Over 60% of the total budget of the United States is mandatory, which some use as evidence that cutting the budget is a much more difficult thing to do than we might appreciate, because it involves changing the law governing these programs. Given the vocal constituencies supporting each of these programs however, this is not an easy thing to do.
Here is a brief rundown of each of these programs:
- Social Security: Social Security is a government run pension fund, also called a social insurance program, that was established in 1935 during the second wave of the New Deal. It is funded, as anyone who receives a paycheck knows, by a payroll tax (the Federal Insurance Contributions Act). Contributors are then eligible for monthly checks after they reach a certain age and retire. Almost 20% of expenditures are spent on Social Security.
- Wikipedia: Social Security.
- Social Security Online.
- Medicare: As with Social Security, Medicare is a social insurance program paid -- with a payroll tax -- that pays for medical benefits primarily for individuals aged 65 or older.
- Wikipedia: Medicare
- Medicare.gov.
- Medicaid: Medicaid is also a health program, but it is a means tested program that provides benefits for the poor.
- Wikipedia: Medicaid:
- Center for Medicaid Services.
- Interest on the Debt: Whenever expenses outweigh revenues, the federal government has to borrow money to fill the gap. Generally these are in the form of treasury bonds which pay interest to the holders of the bonds. The interest on these bonds must be paid if they are to have any integrity. As the size of the debt has increased, the amount needed to pay for the interest on it has increased as well
- Treasury Direct: Interest on the Debt Outstanding.
Discretionary Spending: Discretionary spending is just that, spending that is optional, at least is a budgetary sense. There is nothign in law that mandates that money be spent on any of these items, though there may be political pressure to do so.
- Defense Spending: Spending on the military accounts for half of the discretionary budget and about 20% of the total budget, about the same as Social Security. The Constitution limits defense spending in Section 8 of Article 1: "no appropriation of money to that use [to raise support an army] shall be for a longer term than two years." This requires defense spending to be reauthorized, which it is, but on a one year cycle. Until World War II, defense spending in the U.S. ebbed and flowed depending on whether the country was at war. After World War II the Defense Department was created and a permanent peacetime military was established.
One criticism often thrown at the military budget, aside from its size, is whether expeditures are driven by the actual defense needs, or the desire of members of Congress to provide pork barrel projects for their districts.
- Wikipedia: Military Budget of the United States.
- Other Spending: The total amount of spent on all other discretionary federal programs is the same as the defense budget.
Spending in Texas.
Spending in the Greater Houston Area.
Revenue Collection.
Revenue is collected in a variety of ways in each level of government. On the national level the primary sources of revenue are the income tax, the payroll tax and corporate income taxes. The sales tax is the principle course of revenue in Texas, though some states also use income taxes. The principle source of revenue on the local level is the property tax. States and local governments also recieve a significant amount of money from the federal government. These are broken down below.
- Wikipedia: Taxation in the United States.
- History of Taxation: It is worth noting that the history of political protest in British and American history has often centered on taxes. This was true from Magna Carta to the execution of Charles the First through the signing of the British Declaration of Rights and the U.S. Declaration of Indendence. The North American colonies were lightly taxed until increased security needs required that security be funded. The colonists' belief that the methods used (a variety of sales and excise taxes essentially) were unfairly imposed, led to the revolution. The early federal government used tariffs as its principle means of collecting revenue.
These taxes served an additional purpose beyond collecting revenue. They also protected the development of American industry by raising the prices of goods produced by foreign competitors who had the advantage of economies of scale. Since imports came primarily from the sea, smuggling was a huge problem. Importers attempted to bypass tariffs by avoiding tax collectors. In response the Unites States Revenue Cutter Service was established to enforce tariff policies. They would eventually be merged with other agencies to form the Coast Guard.
- Wikipedia: Taxation History in the United States.
- The Income Tax: An income tax is just that, a tax imposed on income. Generally a handful of exceptions are made about what types of income is taxable (health care benefits for example are exempt) and tax rates tend to progressive, which means that rates increase as incomes rise, though the amount of the increase varies. Income taxes were first used to help fund the Civil War, but did not become a permanent part of the tax system until the passage of the Sixteenth Amendment in 1913. Prior to the passage of the amendment, questions were raised whether income taxes were constitutional. The Constitution allows for direct taxes apportioned to the states according to their population. Since the income does not do this, an amendment was required in order to make it constitutional.
Currently the income tax is appraised based on several tax brackets. The income collected in each of these brackets is taxes at a particular rate, which tops out at a 35% rate for anything earned over approximately $375,000 a year. Taxes are collected by being withheld from paychecks. Any amount collected beyond what is required is returned as a refund the following year.
- Wikipedia: Income Taxes in the United States.
- Payroll Taxes: Payroll taxes are taxes collected specifically to fund Social Security and Medicare. They are separate deductions taken from paychecks that are then dedicated to pay for those programs. The purpose behind this funding mechanism is to ensure that they are more likely to be solvent.
- Wikipedia: Payroll Taxes.
- Wikipedia: Federal Insurance Contribution Act.
- Corporate Income Taxes:
- Wikipedia: Corporate Tax in the United States.
- Capital Gains Taxes:
- Wikipedia: Capital Gains Taxes in the United States.
- Estate Taxes:
- Wikipedia: Estate Taxes in the United States.
Revenue Collection in Texas:
Revenue Collection in the Houston Area:
The Debt, Deficits, and Surpluses.
On the national level, the revenue and spending processes are independent. The national budget therefore is rarely balanced. When expenditures exceed revenues, the budget is in deficit. When revenues exceed expenditures, the budget is in surplus. The sum total of the deficits run over several years is called the national debt.
A History of United States Debt.
Much of early American governmental history was involved with properly handing the national debt, especially the debt accumulated during the revolutionary war. One of the reasons why the Constitutional Convention was called was to determine how to pay down the debt that was owed not only to foreign powers, but to American citizens including those who were issued promissory notes. These notes were especially troublesome because many people had sold these at a fraction of their face value because they were not sure they would ever be paid back in full. Alexander Hamilton was adamant that they be paid back in full because that would be the best way to demonstrate the stability of the new government.
Hamilton was a strong proponent of maintaining a reasonable level of debt as a way to ensure that sufficient investments were being made in the infrastructure necessary to facilitate America's commercial development.
The Current Level of Debt.
The United States has gone through distinct periods of high debt, generally tied into expenditures associated with war. Aside from the Revolutionary War period, the level of debt also exploded during the Civil War and World Wars I and II. While the current level of debt can also be traced to spending on military conflicts (in a constitutional sense we have not had a "war' since World War II), it can also be traced to the increased levels of social spending as a result of the New Deal and the Great Society, as well as the tax cuts that began to be passed beginning in the early 1980s.
The national debt actually has two components. One is the public debt, which is the amount of money that is owed by the national government to individuals who hold Treasury Bills, or any other debt instrument sold to earn the revenue necessary to pay for the spending on budgeted items. The second component is intra-governmental tranfers, which is that money that the national government has borrowed from other sources within the government, most likely the Social Security or Medicare trust funds. These two figues together make up the gross public debt.
As of 2008, the gross public debt was
Here's a controversial question. Is the debt in fact too high? And if it is too high, what problems does it pose?
- Wikipedia: United States Public Debt.
- Wikipedia: National Debt by Presidential Terms.
Deficits and Surpluses.
Simply put, deficits and surpluses are the consequences of imbalances in the budget. A deficit results when more money is spent than is collected in revenue, while a surplus occurs when more revenue is collected than is spent. As mentioned above, the level of spending and revenue collection is often not known ahead of time since much of each is based on a formula not a dollar amount. The amount collected in income, sales and property taxes is not known until we know how much people earned and purchased and the level at which homes have been appraised. And the amount spent is generally determined by how many people qualify for benefits based on whether they meet certain standards, not a predetermined amount.
Managing the Macroeconomy.
Fiscal Policy.
- Wikipedia: Fiscal Policy.
- Wikipedia: Deficit Spending.
Monetary Policy.
- Wikipedia: Monetary Policy.
An Overview of the 2010 Federal Budget.
Receipts
Total: $2.381 trillion
- $1.061 trillion - Individual Income Taxes.
- $940 billion - Social Security and other payroll taxes
- $222 billion - Corporation income taxes
- $77 billion - Excise Taxes
- $23 billion - Customs
- $20 billion - Estate and Gift taxes
- $22 billion - Deposits of earnings
- $16 billion - Other
Expenditures
Total: $3.55 trillion
Mandatory Spending: $2.184 trillion
- $695 billion - Social Security
- $453 billion - Medicare
- $290 billion - Medicaid
- $0 billion - Troubled Asset Relief Program
- $0 billion - Financial stabilization efforts
- $11 billion - Potential disaster costs
- $571 billion - Other mandatory programs
- $164 billion - Interest on National Debt
Discretionary spending: $1.368 trillion
- $663.7 billion - Defense Department
- $72.5 billion - Department of Transportation
- $52.5 billion - Department of Veterans Affairs
- $51.7 billion - Department of State]] and Other International Programs
- $47.5 billion - Department of Housing and Urban Development
- $46.7 billion - Department of Education
- $42.7 billion - Department of Homeland Security
- $26.3 billion - Department of Energy
- $26.0 billion - Department of Agriculture
- $23.9 billion - Department of Justice
- $18.7 billion - National Aeronautics and Space Administration
- $13.8 billion - Department of Commerce
- $13.3 billion - Department of Labor
- $13.3 billion - Department of the Treasury
- $12.0 billion - Department of the Interior
- $10.5 billion - Environmental Protection Agency
- $9.7 billion - Social Security Administration
- $7.0 billion - National Science Foundation
- $5.1 billion - Corps of Engineers
- $5.0 billion - National Infrastructure Bank
- $1.1 billion - Corporation for National and Community Service
- $0.7 billion - Small Business Administration
- $0.6 billion - General Services Administration
- $19.8 billion - Other Agencies
- $105 billion - Other
Deficits
Debts
Projections
- OMB: A New Era of Responsibility.
- Wikipedia: 2010 United States Federal Budget
The Texas Budget
Local Budgets